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No. 96-600
IN THE SUPREME COURT OF THE STATE OF MONTANA
1997

JOHN W. SHARP and DARLENE M. SHARP,
Plaintiffs and Appellants,

v.

DEPARTMENT OF REVENUE OF THE STATE
OF MONTANA; and MICK ROBINSON, in his
capacity as DIRECTOR, DEPARTMENT OF
REVENUE OF THE STATE OF MONTANA,

Defendants and Respondents.

APPEAL FROM: District Court of the First Judicial District, In and for the County
of
Lewis
and Clark, the Honorable Jeffrey M. Sherlock, Judge Presiding

COUNSEL OF RECORD:
For Appellants:

Brian Lilletvedt and John B. Kuhr, Bosh, Kuhr, Dugdale, Martin & Kaze,
Havre, Montana
Henry C. Breighaupt and Milo E. Ormseth, Stoel, Rives, Boley,

Jones & Grey, Portland, Oregon
For Respondents:
Deborah Harten-Moore, Department of Revenue, Helena, Montana

Submitted on Briefs: June 5, 1997

Decided: September 15, 1997
Filed:

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_________________________________________

Clerk

Chief Justice J. A. Turnage delivered the Opinion of the Court.

John W. Sharp and Darlene M. Sharp won $47,000,000 in the multi-state lottery

game known as Lotto America. The Sharps appeal the judgment of the First Judicial
District Court, Lewis and Clark County, that their annual lottery payments are
subject
to Montana state income tax despite their change of residence from Havre, Montana, to
the State of Washington. We affirm.

We restate the issue as whether the District Court erred when it ruled the

Sharps'
lottery proceeds are "income earned in Montana" within the meaning of 15-30-105,
MCA, and are subject to Montana's state income tax.

The State of Montana is a member of the Multi-State Lottery Association
(MSLA), an unincorporated government benefit association of state agencies and the
District of Columbia, with central offices in Des Moines, Iowa. MSLA operates the

multi-state lottery game formerly known as Lotto America. The money for all tickets
purchased in the multi-state lottery is pooled. The winnings are paid from that
pooled
money and are administered for Montana lottery winners by the Montana Lottery
Commission pursuant to 23-7-202, MCA. MSLA rules require that prizes of more than
$250,000 must be paid annually in twenty equal payments.

The Sharps were Montana residents when they won the MSLA lottery in

November 1991.  They are to receive their winnings in twenty annual payments of  
$2,348,000 each.  They reported the first payment of their lottery winnings on their  
1991  
Montana income tax form.  

In August 1992, the Sharps moved to the State of Washington. They filed their

1992 Montana income tax return as part-year residents and did not report their 1992
lottery payment as Montana income because they received it after they moved to
Washington.

After the Montana Department of Revenue (DOR) issued the Sharps assessments

for income taxes due on their 1992 lottery payment, the Sharps filed objections to
the
assessments and then filed this action for declaratory judgment. They maintained

that
their annual lottery payments are in the nature of annuity payments and, as such,
are not
includable as taxable income in Montana.

The DOR moved to dismiss for failure to state a claim upon which relief can be

granted. There being no dispute as to issues of fact, and with the consent of the
parties,
the District Court treated the motion as one for summary judgment. Noting that
similar
challenges to taxation of payments to nonresident lottery winners have been raised
and
rejected in other states, the District Court ruled that the Sharps' 1992 and
subsequent

lottery winnings are taxable as income earned in Montana. The Sharps appeal.
Discussion
Did the District Court err when it ruled the Sharps' lottery proceeds are

"income
earned in Montana" within the meaning of 15-30-105, MCA, and are subject to
Montana's state income tax?

Section 15-30-105, MCA, provides that nonresidents of Montana are subject to
Montana income tax based upon the ratio of income earned in Montana to total income.
"Income earned in Montana" is not defined by statute.
The Sharps assert that 15-30-105, MCA (1991), applies here. That statute
provided for a tax on the income of a nonresident "at the rates specified in 15-30

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Montana Law